Australian bank returns to shrink on extra low rates, competition

Credit: REUTERS/David Gray

By Paulina Duran

SYDNEY, Oct 28 (Reuters) - Returns from Australia's biggest banks are heading towards the single digits for the first time in more than two decades, pushed down by record low interest rates and increased competition from smaller lenders and foreign players, analysts said ahead of second-half earnings reports.

The so called "Big Four", once the envy of banks around the world because of their high returns, are widely expected to report a second consecutive fall in full year cash earnings, weighed down by one-off customer remediation charges totaling almost A$5 billion ($3.41 billion).

Commonwealth Bank of Australia CBA.AX already reported a second consecutive annual profit fall, missing expectations as rising costs and falling rates ate into margins, and the other three majors are expected to post similar results in the coming days.

"They had a really good period post the GFC (global financial crisis) from a credit growth and competition perspective, combined with an incredibly strong housing market, but they are facing a whole range of headwinds now," said Andy Forster, Senior Investment Officer at Argo Investments, who holds positions in all four major banks.

Ultra low interest rates, higher capital requirements, and competition in a low credit growth environment are all expected to push returns lower in coming years, Forster added.

Banks have delivered ROEs averaging over 15% in the years that followed the global financial crisis and currently yield returns of about 12%.

Analysts expect Australia and New Zealand Banking Group ANZ to report full-year flat cash earnings of A$6.5 billion ($4.43 billion), or a ROE of about 10%, when it becomes the first of the remaining three Big Four banks to report on Thursday.

National Australia Bank NAB.AX is forecast to report a 25% fall in second half cash earnings to A$2.1 billion on Nov. 7, according to analysts, which would translate into a ROE of about 9%.

Westpac Banking Corp WBC.AX, meanwhile, is targeting a ROE of up to 14%, but analysts expect it to report A$6.9 billion ($4.7 billion) in full year cash earnings on Nov. 4 - closer to a 10% ROE.

"We believe that Westpac may abandon this and adopt a lower target of about 11-12%," UBS analysts said in a note.


Government interest rates, which are used worldwide as benchmark risk-free rates, have shrunk sharply as central banks take action to stimulate their economies.

The Reserve Bank of Australia this year cut the cash rate to 0.75% from 1.5%, hurting bank margins given they are unable to reduce deposit rates to offset the cheaper mortgages they must offer borrowers.

"Sub 10% RoEs make complete sense when the cost of equity is approaching 8%," said Evans and Partners banking analyst Matthew Wilson.

While the Big Four still dominate about 80% of the home loan market, non-bank lenders and foreign banks are growing their mortgage businesses, taking advantage of the regulator's spotlight on the big banks in the aftermath of a misconduct inquiry.

In the 12 months to June, HSBC HSBA.L, ING Bank, Macquarie Group MQG.AX and Citigroup C.N have grown their mortgage loan books by 14%, according to UBS. ($1 = 1.4658 Australian dollars)

(Reporting by Paulina Duran in Sydney; Editing by Jonathan Barrett and Jane Wardell)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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